The blog of the Urban Institute
February 5, 2020

Budget Stalemates Like North Carolina’s Are about More Than Numbers

February 5, 2020

Like a lot of states, North Carolina is currently having a heated budget debate. However, the Tar Heel State is the only state still arguing over the current fiscal year’s budget (FY 2020).

North Carolina’s state government spends roughly $50 billion each year when including general funds, dedicated funds, bonds, and federal transfers. But the state’s budget debate is about more than numbers. It reflects the state’s priorities, challenges, and history.

The State and Local Finance Initiative created the State Fiscal Briefs to help provide that context for every state and the District of Columbia. Each brief summarizes a state’s finances, politics, economics, and demographics.

So what’s holding up North Carolina’s budget?

Let’s start with politics: North Carolina’s governor is a Democrat but Republicans control both houses of the state legislature. However, a divided government doesn’t always produce a prolonged budget fight.

For example, Massachusetts’s Republican governor and Democratic legislature had their differences last year, but they had no trouble enacting a budget. Louisiana’s Democratic governor and Republican legislature have been through several fiscal fights but were also able to agree on a budget.

Still, divided government can set up a clash of values. In North Carolina, Governor Roy Cooper, a Democrat, wants to expand Medicaid as part of the Affordable Care Act and the Republican-controlled legislature does not. The same debate is happening in Wisconsin. In Montana, the Democratic governor and Republican legislature recently struck a deal on Medicaid expansion.

North Carolina’s other major divide is public schools. Both the governor and legislature support higher spending on K-12 education, but they are far apart on how much to increase spending and whether or not to raise taxes to pay for it. Education funding is a debate in just about every state, and the ongoing discussion in Arizona and Maryland are two good examples.

What do the data say?

A 2018 Urban Institute report estimates that if North Carolina accepts Medicaid expansion it would receive 27 percent more federal Medicaid funds ($4 billion). Accepting those federal dollars would greatly increase health care coverage in the state, considering North Carolina’s relatively low median income and relatively high poverty rate. However, expansion would require North Carolina to increase its state spending on Medicaid by 2 percent ($100 million).

North Carolina spends less per capita on K–12 education than its regional neighbors and the national average. Per capita spending is not a perfect metric and the relationship between education spending and education outcomes is unclear.

Still, teachers went on strike over the lack of funds in 2018 and have threatened to do so again in 2020. The state increased spending on K–12 education in the fiscal year 2019 budget, but not as much as the governor requested.

figure 1

Both of these spending increases would require tax increases. North Carolina has the lowest corporate income tax rate in the nation and one of the lowest individual income tax rates.

North Carolina’s low rates are the result of sweeping tax reform passed in 2013 and championed by then-governor Pat McCrory, a Republican. The tax package reduced corporate and individual income tax rates and offset some of the revenue loss by making more items eligible for the state’s general sales tax. Governor Cooper’s budgets have proposed rolling back some of the income tax cuts. 

Republicans argue the state’s low taxes draw businesses and families to the state. (Neighboring South Carolina is also trying to cut taxes.) Democrats argue North Carolina needs expanded health coverage and an educated workforce to compete. (Neighboring Virginia just accepted Medicaid expansion.)

Who do these policy choices affect?

And what constituencies could shape policymakers’ decisions?

North Carolina’s population is slightly older, and the share with a college degree is slightly less than the national average. And when looking at the state’s economy, chemical manufacturing and the banking industry both contributed far more to North Carolina’s gross domestic product than the national average.

figure 2

Policymakers and community members should consider the importance of these constituencies when debating state policies.

We hope that the State Fiscal Briefs can help residents, policymakers, and local leaders understand how North Carolina (or any state) arrived at its current situation, what its options are, and how to base policy conversations on evidence.

NC Senate Minority Leader Dan Blue (D) discusses the state's budget on January 14, 2020. Photo courtesy of The North State Journal.

SHARE THIS PAGE

As an organization, the Urban Institute does not take positions on issues. Experts are independent and empowered to share their evidence-based views and recommendations shaped by research.